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Price Rigidity and Strategic Uncertainty An Agent-based Approach


  • Robert Somogyi

    () (Paris School of Economics)

  • Janos Vincze

    () (Institute of Economics - Hungarian Academy of Sciences, Corvinus University of Budapest)


The phenomenon of infrequent price changes has troubled economists for decades. Intuitively one feels that for most price-setters there exists a range of inaction, i.e. a substantial measure of the states of the world, within which they do not wish to modify prevailing prices. However, basic economics tells us that when marginal costs change it is rational to change prices, too. Economists wishing to maintain rationality of price-setters resorted to fixed price adjustment costs as an explanation for price rigidity. In this paper we propose an alternative explanation, without recourse to any sort of physical adjustment cost, by putting strategic interaction into the center-stage of our analysis. Price-making is treated as a repeated oligopoly game. The traditional analysis of these games cannot pinpoint any equilibrium as a reasonable "solution" of the strategic situation. Thus there is genuine strategic uncertainty, a situation where decision-makers are uncertain of the strategies of other decision-makers. Hesitation may lead to inaction. To model this situation we follow the style of agent-based models, by modelling firms that change their pricing strategies following an evolutionary algorithm. Our results are promising. In addition to reproducing the known negative relationship between price rigidity and the level of general inflation, our model exhibits several features observed in real data. Moreover, most prices fall into the theoretical "range" without explicitly building this property into strategies.

Suggested Citation

  • Robert Somogyi & Janos Vincze, 2011. "Price Rigidity and Strategic Uncertainty An Agent-based Approach," IEHAS Discussion Papers 1135, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  • Handle: RePEc:has:discpr:1135

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    References listed on IDEAS

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    Cited by:

    1. Váry, Miklós, 2015. "Piaci alkalmazkodás ragadós árak mellett - Calvo-típusú ármerevség egy ágensalapú modellben
      [Market adjustment under sticky prices: the price rigidity of a Calvo type in an agent-based model]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 48-77.

    More about this item


    Agent-based modeling; Evolutionary algorithm; Price rigidity; Social learning; Strategic Uncertainty;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary

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